Petroleum Licensing and Contracting

Although there are no standard method of allocation of licenses and contracts, two approaches can typically be identified from reviewing international practice:

Round of awards

Typically, there are two methods of granting awards:

Today, most bids are made by a consortium of companies. Joint bids are common practice in Australia, Brazil and the UK in particular and allow companies to combine their different technical, financial and commercial strengths, and at the same time share risk and administrative costs.

A ‘Mutual Interest Agreement’ and a ‘Joint Bidding Agreement’ need to be signed prior to submission of a bid, alongside a ‘Confidentiality Agreement’ to ensure all the commercially sensitive information shared with other participants is not disclosed. If the bid is successful, the next step is to sign a Joint Operating Agreement. The risk of joint bidding is that competition for licences will be limited, as more than one participant competes for the same bid.

Competitive bidding

This procedure is more suitable where sufficient geological data is available and investor interest is high, and the host state has the necessary institutional capacity to be able to evaluate each work programme proposed by the bidders and the biddable items under the tenders. The UK and many developing countries for instance awards licences or contracts under this administrative process.

The advantages of competitive bidding are that it increases the transparency of the process and restricts asymmetry of information vis-à-vis the host state. Bidders tend to have more knowledge about geological data than do governments and if negotiations are bilateral with the host state, the informational disadvantage is therefore more likely to play against the host state.

Different bidding parameters employed in the auction method

Auction

Auction procedures ensure that the highest bidder for the bidding term is granted with the rights. Auction is limited to one biddable term only – often the signature bonus, or the royalty. The advantage of this procedure is mostly felt when there is sufficient information on the auction area. Auctions are only used in some countries, such as USA.

Open door

This method is often selected for the areas not awarded after competitive bidding and is preferred where geological information is limited or is not immediately encouraging. In this methodology, the host state adopts an open door, first-come-first-served licensing procedure (subject to the qualification of the applicant, satisfactory evaluation of the application and possible negotiation).

Regulation should provide for a procedure for open door policy, including:

The risk of open door procedure is that the criteria for the award is often not revealed to all market participants and the government will have considerable discretionary power, hence this may not be the most transparent option. Generally, it allows for less competition, and therefore carries a higher risk of corruption. However, if the award criteria are pre-defined and published, or the negotiation proceedings are supervised by an external body, this system can be made more transparent.